Pre-sale home and condo buyers struggle to stay afloat

By Michael MataFont size :

For three decades, Greater Toronto’s housing market enjoyed such robust price growth that many were convinced buying into the market at any price would lead to a huge payday. Market conditions have since taken a major turn, with home sales in the metro area down by nearly 40% over the past year, and prices declining by 14% during the same period.

As a result, many buyers, especially those of pre-sale homes, are now reportedly stuck with homes they can no longer afford. Their investments cannot be sold for the amount they’d expected last year—and with a new government-mandated mortgage stress test in place, plus lenders reassessing the value of GTA properties, investors cannot get mortgages to cover the full amount.

Many of Toronto’s condo investors are also beginning to lose money, according to a new report from CIBC and Urbanation. The report found that nearly half of condos delivered in 2017 (48%) were acquired by investors. And of those, 44% have negative cash flow, meaning rental income isn’t covering the cost of ownership, such as mortgage and condo fees. More than a third of those losing money are losing more than $1,000 a month.

However, the market isn’t exactly ready to tank, as those who bought well before last year’s peak are still seeing healthy numbers. Most owners would not be underwater on their mortgages if they sold their homes today, and many condo investors have made large gains in the resale value of their properties over the past several years, even if rents weren’t covering costs.

Even if investors who’re losing money decide to bail on the market, they would increase housing supply by a marginal 3.4%—hardly enough to flood the market and bury prices.

Nevertheless, the road ahead remains challenging for Toronto’s condo investors. The CIBC/Urbanation study estimates that an investor who purchases a typical condo today would need to see 17% growth in rental rates to make money off that condo when they take possession in 2021. If mortgage rates were to rise by one percentage point, they’d need to see 28% rental growth.

As for those buying pre-sale homes, it means scaling back on ambitions, as homes may not sell tomorrow for the same price as during the peak. Nor are investors guaranteed a mortgage tomorrow that’s as large as the one being offered today because rates are on the rise and regulators may continue to tighten the rules.

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